Highest Return Cattle Producers Hold Down Costs

Assuming that Mother Nature allows the luxury of options, deciding whether to sell sooner or later heading into the fall marketing season is shaping up to be one of those puzzles wrapped in an enigma, more so than usual.

On one hand, USDA’s June Cattle on Feed (COF) report suggested that the industry may have finally exhausted its opportunities for pulling cattle forward. Until then, placements were higher year over year for 12 of the previous 14 months. Even with corn prices bouncing around the nosebleed section, it was the 11% decrease in May placements (June COF) that set the stage for record and near-record prices from late June through mid-July.

The increase of about $30 in the CME October feeder-cattle contract from last fall through mid-July speaks to that as well.

Corn is major key

Fundamentally, though, Dillon Feuz, Utah State University Extension agricultural economist, pointed out in an online pricing workshop last fall that regardless of the price level of corn, a 10¢/bu. change in corn price still sends feeder cattle prices $1/cwt. in the opposite direction.

Though USDA surprised folks with its optimistic reports on acreage and grain stocks in June, corn prices have continued to surge. So, it would seem there continues to be downward price risk for calf and feeder prices due to corn.

Likewise, fed-cattle prices that also support calf and feeder prices are no sure bet, either. Exports continue to be the bright spot – in May they equated to 14.8% of total U.S. production with a value of $205.07/head of fed slaughter, according to the U.S. Meat Export Federation. Domestically, though, the economy continues to struggle for traction. All this is to say that some feel less confident in their fall price predictions yielded by old standbys like monthly seasonal price indices and futures prices plus or minus the basis.

Cattle appear to be moving earlier, too. Whether it’s drought-forced liquidation or simply jumping to take advantage of price points in the volatile market, auction receipts were running heavier this summer than in recent memory. In fact, during the late spring, some order buyers were already fielding contracts for this fall.

Need to know costs

One thing remains constant, though. There’s no way to judge between sell-now or sell-later price projections without knowing the costs.

“While both production (weight) and price do impact profit, they’re much less important than cost in explaining differences between the highest- and lowest-return producers,” says Kevin Dhuyvetter, a Kansas State University agricultural economist.

That’s based on a recent analysis of producers participating in the Kansas Farm Management Association (KFMA). Dividing the last 32 years into thirds by level of return, Dhuyvetter says returns were $177-$195/cow more in the highest-return years than the lowest-return years.

“Unfortunately, this risk is difficult to manage because it’s due to macroeconomic factors and conditions that are typically beyond the control of individual producers,” Dhuyvetter explains. “What is much more important is that the variability across producers at a point in time is much larger than the variability over time. In other words, even in the good years, some producers are losing money; and, even in the bad years, some producers are making money.”

Between 2006 and 2010, the top third of KFMA producers registered returns over variable costs of $116.31/cow, compared to -$146.47/cow for the lowest-return producers. Total variable cost for the top third was $450.94 vs. $598.78 for the lowest third. The same trend exists for returns over total costs.

“The factor that is extremely important regarding profit and cost difference between producers is how well they manage or control their non-feed costs,” Dhuyvetter says.